Why shilling is losing ground to US dollar after brief rally

The shilling gained further to close the year at a mean rate of Sh2394.7558 against the dollar, according to BoT rates.

However, it started to depreciate, closing January 2025 at a mean rate of Sh2,486.6387 to the dollar.

The trend has since continued, and the shilling closed February 2025 at a mean rate of Sh2,581.2878 before sinking further to Sh2,611.786 on Thursday.

The BoT says the depreciation is a result of several factors, including a rise in demand for US dollars occasioned by increased imports, especially in preparation for the holy month of Ramadhan and the Chinese New Year.

BoT governor Emmanuel Tutuba said fuel imports have also been rising and the effects of recent landslides, which have disrupted small-scale mining operations, are contributing to economic pressure.

“The agricultural sector has seen a decline in sales that would typically boost the flow of dollars into the country, and tourism is currently in its low season. Together, these factors are tightening the flow of foreign currency,” he said.

Independent financial analyst Oscar Mkude noted that the drop in the shilling’s value against the dollar is a cyclical movement expected to last only a few days before stabilising.

He explained that temporary demand for foreign currency could cause a short-term fluctuation, but the situation will likely return to normal.

“The real concern would arise if this trend continues for a longer period,” Mr Mkude said, stressing that short-term fluctuations are typical.

Prof Dickson Pastory of the College of Business Education (CBE)said there has been a significant reduction in exports, especially in key sectors like minerals and agricultural products, which were once major sources of foreign exchange.

This reduction, coupled with the demand for dollars due to imported goods and services priced in foreign currencies, is causing the imbalance.

“With fewer exports, limited foreign investments, and a lack of substantial remittances, the supply of foreign currency is constrained. The global trend of a strengthening US dollar further exacerbates the situation,” Prof Pastory said.

The analyst further noted that the continued depreciation of the shilling will likely have a ripple effect on the economy.

One immediate impact will be the rising cost of fuel imports, which could drive up transportation costs and contribute to inflation.

Additionally, the cost of imported goods, from machinery to consumer products, will rise, affecting businesses and households.

Independent analyst Christopher Makombe also noted that the shilling’s depreciation to 2,640 against the US dollar in the first quarter aligns with historical patterns.

“This trend is driven by increased demand for foreign currency as businesses restock after the holiday season and foreign exchange inflows from tourism and agriculture decline,” he said.

According to him, the tourism sector, which typically contributes significantly to foreign exchange reserves, sees a slowdown after the holiday peak, and agricultural exports, such as coffee and cashew nuts, are seeing lower inflows as seasonal flows wind down.